Effects of advertising on the demand for cheese and fluid milk

42 Pages·1991·3.5 MB·English

by  Blisard, William Noel

Historic, Archive Document
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i‘te*s Effects of Advertising on the
Demand for Cheese and
comoay FIUIC Milk
Economics
Division
William N. Blisard
Theresa Sun
James R. Blaylock
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Effects of Advertising on the Demand for Cheese and Fluid Milk. By William N.
Blisard, Theresa Sun, and James R. Blaylock. Commodity Economics Division,
Economic Research Service, U.S. Department of Agriculture. ERS Staff Report
No. AGES 9154.
Abstract
An advertising campaign raised fluid milk sales by about 5,975.4 million
pounds during September 1984-September 1990. Natural and processed cheese
(consumed at home) sales rose by about 23 and 229 million pounds in the same
period. An assessment of 15 cents per hundredweight of milk sold
commercially, mandated by the Dairy and Tobacco Adjustment Act of 1983, funded
the increase in advertising. The authors use econometric demand models to
introduce variables that would offset or complement dairy-centered
advertising. In both branded and generic advertising, changes in market
price, income, and the availability of substitute goods are factors that
influence the demand for natural and processed cheese.
Keywords: Cheese, fluid milk, advertising, demand, entry, exit, distributed
lag, econometric, generic, processed, elasticities.
Acknowledgments
The authors appreciate the valuable comments of the U.S. Department of
Agriculture’s Oversight Committee on Dairy Promotion, computer and econometric
assistance from David M. Smallwood, and the input from many other individuals
and organizations, including the National Dairy Promotion and Research Board,
United Dairy Industry Association, Wisconsin Milk Marketing Board, and the
California Milk Advisory Board. A special thanks is extended to Betty Barrett
who helped in the preparation of this manuscript.
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Contents
Page
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Summary
Simulation results show that increased advertising raised fluid milk sales by
about 4.4 percent or by 5,975.4 million pounds during September 1984-September
1990. These sales were for milk consumed through all outlets in 12 markets
(see appendix). The estimated milk model shows that a 10-percent increase in
milk price would result in a 1.5-percent decrease in milk sales. Likewise, a
10-percent increase in income would result in a 2.5-percent increase in milk
sales.
The econometric model indicates that the effectiveness of generic milk
advertising has increased every year since the implementation of the 1983
Tobacco and Dairy Adjustment Act (ACT). In addition, analysis indicates that
the negative downward trend in milk consumption that occurred in the pre-act
period has been reversed, at least for the 12 regions represented in the milk
model.
Females, households with children under 18 years of age, and single-person
households have a positive impact on milk consumption; black and rural
households have a negative effect. In addition, as the average level of
education of the population increases, the quantity of milk consumed declines.
Simulation results show that increased advertising raised national natural
cheese sales by about 23 million pounds and national processed cheese sales by
about 229 million pounds during September 1984-June 1990. These sales were
for cheese consumed at home. Declining real prices of natural cheese
increased sales by about 645 million pounds. Increasing real incomes raised
natural cheese sales by 487 million pounds and processed cheese sales by about
17 million pounds.
Generic advertising of cheese does not influence households that normally
purchase natural cheese to increase their purchases, but it does influence
households that do not normally purchase cheese to purchase natural cheese.
Advertising affects the number of households that purchase processed cheese
and leads to increased purchases by those households that normally purchase
processed cheese.
An assessment of 15 cents per hundredweight of milk sold commercially,
mandated by the Dairy and Tobacco Adjustment Act of 1983, funded the
advertising. The authors used estimated econometric demand models to simulate
these results.
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7
Effects of Advertising on the Demand
for Cheese and Fluid Milk
William N. Blisard
Theresa Sun
James R. Blaylock
Introduction
Both advertisers and producers of goods and services would like to know how
advertising affects the demand for a particular product. Each year millions
of dollars are spent on advertising in the hope that the public can be
persuaded to purchase new products or to make additional purchases of goods
already being consumed. In 1983, the Dairy and Tobacco Adjustment Act (Public
Law 98-180) authorized a national program for dairy product promotion,
research, and nutrition education as components of a comprehensive strategy to
reduce milk supplies and increase consumption of milk and dairy products.
This study reports on research to determine the effect of advertising on the
demand for fluid milk and natural and processed cheese. Specifically, the
objectives of this study were to:
(1) Determine what, if any, effect generic and branded advertising has on
the demand for natural and processed cheese and fluid milk.
(2) Determine if advertising increases the average quantity of cheese
purchased by consumers, or if it induces consumers to enter the cheese
market, or if it does both.
(3) Determine if the coefficient of the generic advertising variable
changed over time in both the cheese and fluid milk models.
We obtained data and estimated a demand equation for fluid milk sales in 12
geographic regions of the United States from December 1978-September 1990. We
specified a second-order polynomial distributed lag with 12 lagged time
periods to capture the dynamic aspects of the advertising variable.
Our results indicate that advertising has a statistically significant effect
in increasing fluid milk sales in the regions studied. In addition, the model
indicates that the effectiveness of advertising has increased in magnitude
each year since the inception of the act. Likewise, trend variables which are
included in the model to account for unexplained gradual changes in fluid milk
consumption have become positive since inception of the act.
Our analysis of the data and simulation results indicate that over the
September 1984-September 1990 period a total of $153,468,183 was spent on
fluid milk generic advertising in the 12 regions. Since the inception of the
act, generic advertising was found to increase fluid milk sales by
approximately 5,975.4 million pounds, or about 4.4 percent, assuming that
advertising would continue at pre-act levels even if the legislation had not
been enacted.
We estimated national demand equations for natural and processed cheese
purchases for at-home consumption during the January 1982-June 1990 period.
We specified a gamma distributed lag to capture the dynamic aspects of the
advertising variables. We chose the gamma lag because it is a flexible
function that does not require a specified lag length. We feel that this
choice allows the data to play a larger role in determining the shape of the
lag structure. In addition, both the natural and processed cheese equations
allowed the coefficient of generic advertising to vary over time.
We determined that generic advertising was statistically significant in
increasing the demand for natural cheese, but branded promotion was not. We
determined that generic advertising influences consumption only in the current
period. We did not find any evidence indicating that the coefficients on
generic advertising had been changing over time.
Our results for processed cheese were not meaningful when we divided
advertising into branded and generic variables. However, when we combined the
variables, we found that advertising had a statistically significant influence
on cheese consumption. This influence was largest in the current month and
declined slowly, with 12-month-old advertising having about 40 percent of the
effect of current period advertising.
Because of the availability of household panel data we were able to estimate
two additional equations each for both natural and processed cheese. These
equations allowed us to determine if advertising induces consumers to enter
the natural (processed) cheese market or to make larger purchases of natural
(processed) cheese.
Our results also indicate that generic advertising increased the proportion of
consumers entering the natural cheese market, but that it did not induce those
already in the market to increase their purchases. Branded advertising was
found to have no effect on either variable. In the other two processed cheese
equations, advertising increased the proportion of consumers in the market,
and it induced those already in the processed cheese market to increase their
purchases.
Background on Advertising
Advertising is directed toward existing and potential consumers of a product
with the objective of enhancing sales. "Branded" advertising promotes the
particular characteristics of a given "brand" of the commodity. "Generic"
advertising promotes consumption of the general commodity by a cooperative
effort of producers.
Sheth (1974) identifies four separate mechanisms through which advertising
produces potential changes in consumer demand: precipitation, persuasion,
reinforcement, and reminder. Precipitation encourages consumers to become
buyers of a product. Persuasion encourages consumers to choose among
alternative "brands" within a product category. Reinforcement continually